Section 194J – Fees for professional or technical services

The deduction of tax at source (TDS) has been very helpful in the collection of taxes in the country by targeting the source of income itself. TDS eases the taxpayer’s burden of paying tax when it is time to file their income tax returns. That is because, at the time of filing income tax return they can take the credit for the taxes deducted at source. 

One of the most important and common type of payments that a business entity makes is towards professional fees or fees for technical services. Some illustrative examples of professional fees are fees paid to a lawyer, doctor, engineer, architect, chartered accountant, interior decorators, advertisers, etc. Technical services would include the rendering of managerial, technical or consultancy services. Such payments made to residents are covered under section 194J.

Types of payments covered

The type of payments to residents covered under this section are as follows:

• Fees for Professional fees
• Fees for technical services
• Remuneration paid to directors excluding salary (For e.g., sitting fees to attend board meetings)
• Royalty
• Payments in the nature of non-compete fees (i.e., fees paid to not carry on any business or profession for a specified time and within certain geographical boundaries) or fees paid to not share any technical knowledge or know-how.

Meaning of various terms

Professional services

It implies the services provided by a person for carrying on medical, legal, architectural, or engineering professions. It also includes accountancy, advertising, interior decoration, technical consultancy or any other profession notified by CBDT Board under Section 44AA.

CBDT has, to date, notified the profession of a film artist, company secretary, and authorised representatives under Section 44AA.

CBDT has further notified sportspersons, commentators, event managers, anchors, umpires and referees, physiotherapists, coaches and trainers, team physicians, and sports columnists under Section 194J.

Technical services

As per income tax rules, ‘fees for technical services’ means managerial, technical, and consultancy services but does not include payments considered as Salary by the recipient of such income. 

• One can define technical services as providing services that involve technical expertise or expertise in technology. 
• The scope of managerial services can be defined as running and management of the business of the client. 
• Consultancy services can be understood as advisory services wherein necessary advice and consultation are given to the clients for their business.

As per the Supreme Court’s judgment, technical service would include services provided by a human. It would not have any service provided by machines or robots.

Royalty

Royalty means the payment made for:

• Transfer of rights or usage of an invention, model, design, trademark, patent, etc.
• Use of patents, inventions, designs, etc.
• Provide any information related to using an invention, patent, formula, etc.
• Transfer of rights related to scientific findings, literary work, films or videotapes for radio broadcasting but does not include consideration for the sale, exhibition, or distribution of cinematographic films.
• Providing any information related to technical, industrial, commercial or scientific knowledge, experience or skill

Non-compete fees

Non-Compete Fees imply the payment made in cash or kind in return for an agreement that binds them from sharing any license, patent, trademark, franchise, know-how, commercial or business rights, or information likely to be utilised elsewhere for processing, manufacture, or any other provisional service.

Threshold limit for deducting tax

• Tax has to be deducted in case the payment for the professional and technical services is greater than Rs 30,000 during the year.
• Please note, this Rs 30,000 maximum limit is applicable to each item or payment independently.
  • For example, ABC company paid Rs 25,000/- as royalty and Rs 20,000/- as fees for technical services to Mr.PK. Here ABC company is not liable to deduct TDS from payments made to Mr.PK. It is because Rs 30,000 is a separate limit for each item, i.e. royalty and fees for technical services.
• However, there is no such limit for payments (commission, fees or remuneration) made to a director by the company. The tax will have to be deducted no matter how small the amount.

Persons liable to deduct tax

Every person making a payment in the nature of fees for professional or technical services is liable to deduct tax at source. However, below persons are not liable to deduct TDS on such payments:

• In case of an individual or HUF carrying on business: Where turnover does not exceed Rs 1 crore during the previous financial year..
• In case of an individual or HUF carrying on profession: Where turnover does not exceed Rs 50 lakh during the previous financial year.

To put it simply, all entities (other than individuals/HUF who are not required to do tax audit in the preceding year) need to deduct tax (TDS) while paying fees for professional or technical services.

Rate of Deduction of Tax Under Section 194J

Time of tax deduction under Section 194J

The tax should be deducted at the time of-

• Passing such entry in the accounts or
• Making the actual payment of the expense,

whichever earlier.

Examples on TDS on professional and technical services

Example 1: Mr. Jay has availed professional service from Mr. Veer in F.Y. 2023-24. First payment was in April month of Rs 55,000 and second payment was in December month of Rs 22,000. Let us check the TDS liability for both the payments for the F.Y. 2023-24 in three scenarios:
 

1. Mr. Jay is not liable for audit u/s 44AB.
2. Mr. Jay is liable for audit u/s 44AB and he has taken service for personal purpose.
3. Tax audit u/s 44AB is applicable to Mr. Jay in F.Y. 2023-24 and he has taken professional service for business purpose.

Analysis of situation 1
Since Mr. Jay is not liable for Tax Audit u/s 44AB he is not liable to deduct tax while making payment to Mr. Veer.

Analysis of situation 2
Though Mr. Jay has taken professional service but that was for personal purpose. Hence, no TDS is required to be deducted while making payments for such services.

Analysis of situation 3
If Tax Audit is applicable to Mr. Jay and he avails the professional services for business purpose, then TDS @10% must be deducted at Rs. 55,000 while making payment or credit in the accounts, whichever is earlier. This is because the transaction has exceeded the threshold limit of Rs. 30,000. 

Similarly, since the transaction amount has exceeded the threshold limit in the financial year, TDS should be deducted for all the payments made to Mr. Veer. Hence, tax shall be deducted at source on second payment of Rs. 22,000 also.

Example 2: A Badminton Club has engaged Mr Pravin, a resident in India, as its coach at a remuneration of Rs 10 lakh per annum. Whether the club liable to deduct TDS from such payment?

Services provided by coaches for sports activities are notified as professional services under section 194J. Also, the amount of remuneration is more than Rs 30,000 per annum. Therefore, the Badminton Club is liable to deduct TDS under section 194J from the remuneration payable to the Coach, Mr Pravin.

Consequences of non-deduction or late deduction of TDS

Not deducting the tax or late deduction of the tax has a two-fold consequence:

• Disallowance of a part of the expenditure: 30% of the expenditure shall be disallowed in the year in which the expenditure is claimed (taken to the profit and loss account) – however, the 30% disallowed shall be re-allowed in the year in which the TDS is paid to the government. 
• Levy of interest until date of payment: In case there is a delay in the payment of tax, interest has to be paid along with the TDS to the Government. The rate of interest is determined in the following manner:
  • Where no deduction of tax has been made: Interest shall be payable at 1% per month/part of month from the date on which such tax was required to be deducted up to the date of actual deduction.
  • Where tax has been deducted but not paid to the government: Interest shall be payable at 1.5% per month/part of month from the date on which such tax was deducted up to the date of payment to the government.

Time limit for deposit of TDS 

Know all about TDS and refer TDS rate chart to know more about TDS rates